Lifetime Brands Inc (LCUT) 2007 Q3 法說會逐字稿

Welcome to the Lifetime Brands Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks we'll hold a Q&A session. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded today, November 6, 2007. I would now like to turn the conference over to Harriet Fried. Please go ahead, ma'am.

Thank you, operator. Good morning everyone and thank you for joining Lifetime Brands third quarter 2007 conference call. With us today from management are Jeffrey Siegel, Chairman, President and CEO; Larry Winoker, Senior Vice President and CFO; and Chris Kasper, Senior Vice President, Corporate Development.

Before we begin I'll read the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this conference call that are not historical facts are forward-looking statements and involve risks and uncertainties including, but not limited to, product demand and market acceptance risks, the effects of economic conditions, the impact of competitive products and pricing, product development, commercialization, technological difficulties, capacity constraints or difficulties, the results of financing efforts, the effects of the Company's accounting policies and other details contained in its filings with the SEC. The Company undertakes no obligation to update these forward-looking statements.

With that introduction I'd like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Thanks, Harriet. Good morning, everyone. As detailed in this morning's press release, Lifetime sales for the third quarter of 2007 reflects an environment where most retailers adopted a very cautious wait-and-see approach to building inventory for the holiday season. While we achieved our aggressive marketplace objectives of new program launches, expanded product placement and strong gross margins, slowing retail demand during the period limited our growth. The slowdown was nearly across the board for all our product categories and distribution channels.

Numerous commentators have attributed the slowdown in retail sales to higher food and MG prices, which profoundly affects the buying power of most American families, and to the well-publicized problems in the mortgage markets which have created a level of economic uncertainty. Historically, the housewares' industry has been remarkably recession-resistant, and over the long term more people preparing meals at home would be good for Lifetime's business. Moreover, with our broad distribution featuring many brands and multiple price points we're well prepared to continue to increase our market share.

However, in the short term, uncertainty inevitably creates a temporary slowdown, as people are forced to realign their habits and figure out how to get by under more challenging economic circumstances.

On a positive note, let me emphasize that Lifetime's market position this holiday shopping season is stronger than ever and we're in an excellent position to benefit if the season develops more favorably than some have predicted. This morning and throughout the holiday shopping season we will have more items occupying more shelf space in more retail doors than ever before in our history.

Looking at our core wholesale business, our Cutlery category continues to be a real standout; gaining placement, getting market position and showing the kind of the growth that we can generate when we combine our powerful brands with our unique capabilities, innovation and product development. While it's still early in the life of the programs, we've received reports of initial success for the Martha Stewart brand of program we've recently launched at Macy's; another new private label line, The Food Network program, which we launched at Kohl's also appears to be doing well.

We also generated excellent growth in the Home Decor category that we entered last year when we acquired Syratech Corporation. One of the ways we did this was to increase sales at accounts that were under-penetrated by Syratech. And, in the process, we validated the critical component of our acquisition strategy, which is based on expanding into new product categories and then leveraging our innovation and sourcing skills, as well as our strong customer relationships to drive growth.

By contrast, the industry-wide slowdown in Silicone bakeware that I mentioned in the last quarter has continued. We've refocused our product development in this category on Nevel bakeware, which generally picks up late in the fourth quarter around the time of Thanksgiving.

We had a successful Tabletop market in New York City last month and expect new placement for both housewares and luxury dinnerware and glassware products in 2008. We also introduced Sterling 365, a program aimed to revitalize the sterling flatware business by redefining sterling for today's consumer. It's been well received by the traded and we've already confirmed new placement at a major retailer that previously had not carried the category; replacement in many specialty stores; as well as increased placement in current customers.

Moving the Direct to Consumer segment of our business, we are pleased with the improvement we made in the third quarter where segment loss for the third quarter declined by approximately $1.8 million year-over-year. Chris Kasper will provide more details on the many changes we've made to produce this improvement. With that said, we continue to evaluate the long-term viability of the factory outlet store model and its strategic importance to Lifetime and intend to come to a decision about the best way to proceed before year-end. You should expect us to announce our plan in early 2008.

In the meantime, we continue to expand our Internet and Catalogue portions of the Direct-to-Consumer business, which we consider an important part of our enterprise.

Another initiative I'd like to report on is our effort to reduce inventory and thereby improve our working capital efficiency and pre-tax load. This has become a major priority for Lifetime and we expect improvements due to increased senior management focus, as well as the greater visibility into inventory levels and enhanced planning capabilities our SAP system makes possible.

We've also changed the incentive compensation of our sales and division management to include for the first time inventory metrics. Our goal is to have 2007 year-end inventory levels below year-end 2006, when inventory totaled $155 million on an acquisition-adjusted basis. Chris will provide more details on our progress through September 30, shortly.

I'd also like to give you an update on our acquisition of a 30% stake in Ekco, S.A.B., one of Mexico's leading housewares companies. We are on track to close the transaction by year-end. In the meantime, we have been moving ahead with our plans to launch a full line of Baskonia brand of products to be marketed by us in the United States. It will initially include over 150 SKUs and we expect to start shipping at the beginning of the second quarter of 2008. When the line is fully developed, we expect to be marketing over 250 SKUS of product oriented towards the Latino market.

Baskonia, one of Mexico's best known brands, presents us an outstanding platform by which to reach U.S. consumers of Latino heritage, including some 45 million people whose principal language is Spanish; over 70% of whom are of Mexican descent; as well as the many non-Latino consumers who enjoy preparing ethnic cuisine and prefer to use authentic ingredients and equipment.

Later this month we will begin showing our Baskonia products through retailers, especially those that have a large number of stores with significant Latino demographics. As part of this program, we've announced a partnership with the Hispanic Scholarship Foundation, similar to our successful marketing partnership with Cook for the Cure and the Breast Cancer Research Foundation.

I'd like to make a couple of comments about our position in China, which has been much in the news recently. Over the last several months, we've been faced with significant challenges in pricing due to the exchange rate, back-tax changes, labor increases, material increases, as well as social and environmental costs imposed on factories by the Chinese government. We've used our core strengths in design, engineering and sourcing to successfully overcome these challenges and maintain our margins.

We're in the process of expanding our China offices to allow more backroom functions to be performed overseas, as well as increasing our already large staff devoted to quality assurance and quality control and establishing a China product development team to complement the over-90-person design staff we have in the United States.

We're very conscious of the environmental and social issues that affect our Chinese vendor partners and the well-publicized concern about safety of some products made in China. I'm very pleased with the performance of our Asian offices and remain confident that we will continue to maintain an excellent track record with respect to product quality.

Before I turn the call over to Larry Winoker to go over our third quarter results in detail, I'll talk for a moment about our outlook for the fourth quarter. As I noted a moment ago, Lifetime's market position for the holiday shopping season is strong and we're in excellent position to benefit if the season develops more favorably than most have predicted. However, the cautious approach many retailers are taking, along with predictions of a weak Christmas selling season, means that we think it's prudent that we scale back our financial output for 2007, and Chris will provide you with the details.

Despite today's strong headwinds, however, we believe Lifetime's business is fundamentally strong and we're continuing to gain market share and we believe our long-term business prospects are outstanding. Larry?

Thanks, Jeff. Net sales for the third quarter of 2007 were $143.5 million compared to $141.7 million in the 2006 period, an increase of 1.3%. Net income was $6.8 million, or $0.47 per diluted share for 2007 compared to net income of $6.7 million, or $0.45 per diluted share in the 2006 period.

For our Wholesale segment, net sales were $123.2 million for the third quarter of 2007 and $120.7 million in the 2006 period, an increase of 2.1%. This increase came from our Home Decor category which gained new retail placement.

In the Direct to Consumer segment, net sales were $20.3 million for the 2007 quarter compared to $21 million for 2006. This decrease in sales was due primarily to the elimination of excess promotional discounting which occurred in 2006 and the closing of certain unprofitable Farberware stores. The decrease was partially offset by sales growth in the Internet-Catalogue channel.

On a consolidated basis, cost of sales for third quarter of 2007 was $84.5 million , or 58.9% of sales, compared to $84.3 million, or 59.5% of sales for the comparable 2006 period.

In the Wholesale segment, cost of sales was 62.4% of net sales in 2007 compared to 61.7% in the 2006 period. The higher cost of sales percentage was due to sales mix primarily the result of the increase in sales from the Home Decor category that operates at a lower gross margin percent than our other wholesale product categories.

In the Direct to Consumer segment, cost of sales of 37.9% of sales in the 2007 quarter compared to 46.6% in 2006. This significant improvement reflects the favorable impact of our decision to eliminate the excess promotional discounting in 2006 and growth in Internet and Catalogue sales that generate higher gross margins than the outlet stores.

Distribution expenses were $13.1 million, or 9.1% of net sales in the third quarter of 2007, compared to $13.7 million or 9.7% of net sales in the 2006 period.

In the Wholesale segment, distribution expense as a percent of net sales improved to 7.8% in 2007 from 9% in 2006. This improvement was due to better management of labor hours. In addition, wholesale distribution expenses as a percent of sales has declined from historical level due to the Syratech business, which has a much higher proportion of its sales shipped directly to customers from overseas' supplies than the Company's other wholesale products.

For the Direct to Consumer segment, distribution expenses were 16.7% of net sales for the third quarter of 2007 compared to 14% in the 2006 period. The increase in expenses was due to receiving and storage costs associated with higher inventory levels and the increase in shipping and handling costs associated with the growth in the Internet and Catalogue channel.

Total Selling, General and Administrative expenses for the 2007 quarter was $32.1 million versus $31.3 million in 2006, an increase of 2.7%. The increase was in the Wholesale segment reflecting higher expenses for our new headquarters and SAP business enterprise system. These expenses were partially offset by savings from the Direct to Consumer segment. Included in SG&A are unallocated corporate expenses, which for the 2007 and 2006 quarters were $2.8 million and $2.4 million, respectively. This increase was due to higher stock option expense and professional fees.

Income from operations for the quarter ended September 30, 2007 was $13.8 million compared to $12.4 million for the 2006 period. In our Wholesale segment, income from operations was $17.7 million and $17.5 million in 2007 and 2006, respectively. In the Direct to Consumer segment, the loss from operations was $1.1 million and $2.7 million in 2007 and 2006, respectively.

Interest expense for the third quarter in 2007 was $2.6 million versus $1.5 million in the 2006 period. The increase was due to higher bank borrowings outstanding during the 2007 period.

Turning to the Balance Sheet, our financial condition remains strong. As of September 30, 2007, availability under our bank credit facility was approximately $33 million, and as of October 31, 2007, it has increased to approximately $49 million. During the third quarter in addition to normal seasonal liquidity requirements, we used $15.1 million of our bank facility to repurchase shares of our common stock and $8.3 million to acquire more. Capital expenditures were approximately $3 million during 2007 quarter.

Now, I'll turn the call over to

Thanks, Larry. I'd like to focus my comments on three important initiatives of the Company. First, addressing the Direct to Consumer business. Second, improving our pre-tax flow. And third, maximizing the value from our acquisitions. I will also comment on the revised earning status.

In the Direct to Consumer business, improving performance and reducing the segment's losses has been one of Lifetime's top priorities. A new management team we installed in August of last year to overhaul the DTC business implemented a number of important changes. They closed eight unprofitable or marginally-profitable stores; eliminated a significant out-of-stock position in the Farberware branded outlets; discontinued a pattern of overly-aggressive promotion; focused on improving the in-store merchandizing; and redoubled efforts to augment the growth of the Internet and Catalogue channel.

As a result, we reduced our loss in the third quarter by $1.8 million compared to last year. This was driven by an 870 basis point increase in gross profit margin. On a year-to-date basis, growth margins are also 870 basis points higher than last year. And while comp stores sales remain down primarily due to the reduction of off-price and promotional business, we continue to expect the division to post a substantial reduction in losses compared to the prior year.

As Jeff noted, we are actively working on finalizing our strategies for the DTC segment and you can expect a further update on our strategies in early 2008.

The second initiative is to improve the free cash flow of the business, and there are two important levers that bear comment. First, is the inventory improvement initiative that Jeff mentioned. We made significant strides in the third quarter as our inventory levels as of September 30, excluding acquisitions, were only $6 million higher than as of June 30. This compares to an increase of $29 million in the prior-year period, and this progress was made during a period of weaker-than-expected sales.

Our goal of ending the year with inventory levels, adjusted for acquisition, below the prior year implies an improvement in our underlying inventory term and we expect this trend to continue into 2008.

The second cash flow driver is our expectation that capital expenditure requirements will be dramatically lower in the future. Through September 30, our LTM capital expenditures were $27.5 million due primarily to two significant infrastructure investments with a total capital investment of nearly $20 million.

The first was our new SAP system, while the other was our new Garden City showroom, Design Center and corporate offices. Both of these investments create an infrastructure platform that should provide the operating leverage as we continue expand our business.

Further, our cap ex spending in Q3 was approximately $3 million, and our plan for the fourth quarter is $2 million. We expect these dramatically lower levels to continue into our cap ex spending over the next few years to be in a range of $8 to $10 million per year.

The third initiative I mentioned is working to ensure we maximize the value from our acquisitions. Jeff discussed the opportunity for us to benefit from investment in Ekco through the launch of the Baskonia brand in the U.S. But Ekco's business in Mexico is also expected to generate a return on investment for Lifetime. Ekco's business continues to perform well and the company has made great strides in integrating its acquisition of Imasa, one of Mexico's largest aluminum smelter and rolling mills, which was acquired in February of this year. Ekco expects to reach substantial synergy from consolidating duplicate manufacturing facilities, as well as from growing the wholesale business through leveraging Lifetime's brands, product designs and sourcing capability. Our acquisition of a 30% interest will close as soon as the waiting period established by the Mexican Security's Regulatory Authority as elapsed, which we expect to be before year-end.

In addition, our integration of the Gorham Sterling Silver business has been completed with all equipment and tooling relocated to our Puerto Rico sterling flatware plant and inventory relocated to Lifetime's Massachusetts Distribution Center. The synergies have exceeded our expectation, as we have not had to hire a single new employee to manufacture, market or sell the Gorham line. Further, we sold approximately $900,000 of Gorham products directly out of the acquired inventory in the third quarter recovering over 10% of the purchase price in less than three months.

As for new opportunities, we are currently in discussions with our principal Canadian distribution to expand distribution of Lifetime's products north of the border where we have historically been under-penetrated. While they are not an acquisition per se, as there will be no tax investment required of Lifetime, this agreement should work to further strengthen our North American market position.

Our acquisition pipeline continues to present us with a myriad of opportunities, both for old time, as well as new complementary product categories. As we've emphasized in the past, our acquisition strategy remains focused and we have no intention of moving outside the market Lifetime knows well.

Finally, following up on Jeff's comments about reviving Lifetime's guidance, given the cautious stance taken by retailers and the uncertain economic environment, we now anticipate that net sales for the year will be between $500 and $515 million, and that diluted earnings per share will be between $1.10 and $1.20. This forecast includes approximately $0.15 per diluted share attributable to the sale of Lifetime's former headquarters' building in Westbury, which is scheduled to close later this month.

Despite the change in near-term financial outlook, we remain confident that Lifetime's competitive advantages positions the Company for a strong growth and increased profitability.

Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS) Your first question is from Steve Colbert with Canaccord Adams. Please go ahead with your question.

Hi, guys. Good morning. Can you talk a bit more about what you saw from retailers with their purchases and their current inventory levels? How thin are inventories out there? Any way to quantify that?

I talked to several senior executives at mass merchant department stores and specialty stores in the last couple of weeks. Inventory levels are not particularly high. We carefully watch our own within the retail stores, so I don't see inventories as being high in stores.

Okay. And how did retail purchases trend over the quarter? Was there a significant falloff, or did things just not pick up the way that you had anticipated?

There was definitely - well, October is always a stronger month, but there was definitely a falloff as far as we're concerned. If you would have asked me in August about our prospects for the quarter, I would have given you a completely different answer than I would have in September, okay? And definitely a follow up quote at the end of the quarter.

Okay. And then if we look at the new guidance, I may be mistaken, but does the prior range of $140 to $150 include the $0.15 benefit from the building sale?

It did not.

It did not. Okay-okay. And then one other thing, a little bit of housekeeping, what was the share count for Q3 and what full-year count should we be using?

For the earnings per share we used 15.8 million. It'll be because of the affect of the purchases of stock, it will have a little more weight for the full year. So, it will come down a bit from that.

Okay, so a little bit less from the 14.7 from last year's full-year number?

Do you want to repeat that please?

A little bit less than the 14.7 from last year's full-year number then?

The number I'm quoting includes the effect of the dilution associated with the conversion of the debentures.

Steve, you're correct. The 2006 shares outstanding for the purposes of calculating diluted EPS was 14.7 million. The number this year is higher even after the share repurchases, because you have a full-year convertible bond sitting in the 2007 figure. The number of 15.8 million shares for the purposes of calculating fully-diluted EPS is the correct number to use.

Okay, great. Thank you. That's it for me.

Your next question is from Gary Giblen with Goldsmith Harris.

Hi. Good morning, everybody.

Good morning, Gary.

Could you just explain sort of conceptually why your sales guidance is coming down 3.5% or so? The earnings per share are coming down 35%. I understand the notion of marginal contribution on incremental items, but I mean is there also any element of liquidating inventory or providing lower prices to the retailers?

No, that's not it. It really, first and foremost is an issue of the operating leverage in the business, which unfortunately in the cases of a lower top line really does substantially impact the bottom line, and that is the primary driver. So I think the gross profit margins that you see continue to be healthy and strong and that's not been an issue.

Okay. I mean can you tell us what the comp store sales for your own retail comes out to be?

Yes. For the quarter, they were $11.2 for 2007 third quarter versus $11.4 for 2006.

Okay, so we're basically flat? Okay.

Remember, that we mentioned in the script that last year we had significant promo activity that we didn't repeat this year that was unprofitable last year and had a favorable impact this year, but it did bring down the top line.

Okay, great. And how are things progressing on building Internet sales and having an organizational effort behind that?

Well, our Internet and Catalogue business is increasing and for the first nine months we certainly had a nice positive increase in that business. Larry is going to see if he can get a number for us. And we are certainly are well focused on that. We've hired a terrific consultant, who is advising us on how to build that business. That part of the business is not broken, not in any way. The brick-and-mortar outlets is what we're concentrating on fixing or finding out, figuring out what else we should do with it.

Yes, year-to-date, year-over-year in Internet and Catalogue were up 11.3% top line.

Okay. I mean is the thought still to have a permanent manager or VP in charge of that, or is this the organizations that you'll have going forward?

Right now, with this outside consultant who is very experienced and spending quite a bit of time with us, it's experienced specifically in Internet and Catalogue, and Internet business more than anything else. The current management certainly can handle it with this help. Long-term, they might want to bring on board some more help.

Okay, and then finally, just to clarify, you said that we can expect to hear by early '08 what your plans are for the brick-and-mortar retail. In other words, that would be when you would make your decision, or would the decision be some [inaudible]?

No, Gary. We will internally be deciding and finalizing our strategy over the next month. We will be announcing that most likely with our full-year fourth quarter results conference call.

Yes, okay. That's what I'm trying to clarify. So okay, great. Thanks very much.

Your next question is from Derek Leckow with Barrington Research.

Thanks. Good morning, everybody.

Good morning, Derek.

I have a question on your leading indicators here. Your typical leading indicators of more products and more stores and more shelf space, those all went positively, but their sales went the opposite direction it sounds like. I just wondered if you could help me understand how sensitive you are to the retailers for the last-minute planning and how flexible are you to recover some of that if things do change here in November and December?

We're absolutely sensitive to the last-minute planning and things can definitely change. We're taking a conservative approach, obviously a very conservative approach. Because of everything we're reading, everything we're hearing from retailers, everything we're hearing about different specifications within the retail trade, the only positive things that I've heard from the retailers that I've talked to are, frankly, the food business is good. That's especially so with the lower-level retailers who are a less expensive place to buy food. If consumers are going to trade down, they'll trade down to where the food is cheapest.

We are positioned to do everything that we originally expected to do in the fourth quarter if the business does turn around at retail. We certainly have the placement. We have the right products out there. We're in more doors than we ever were before. I think the retailers that I talked to, and we were at a Tabletop show and I talked to a number of major retailers at the Tabletop show. I visited a number of retailers in the last couple weeks, major ones, and talked to senior people at mass merchants, department stores and specialty stores, and they all give me the same feeling that they see the consumer as being stressed at all levels. You have a lower-income consumer who's stressed by the high-end and rising price of gasoline and oil prices, as well as inflation in consumer package business and food inflation which is hurting the low-end consumer.

The middle-level consumer is stressed by the same issues and, in addition, by the well-publicized mortgage issues, as well as the bad feelings caused by falling home values.

Then, you have an upper-level consumer that's showing a steady loss of consumer confidence due to all the same things and the foreclosures and the price of oil especially and just a lack of confidence in the processes, the political processes, as well as the economy.

So, retail is giving me this feeling, and very strongly so is leading us to be very conservative on our approach. We have the merchandize to be able to do the business and we expect that if it turns around, or if it's even decent, we will do it. We did not have last year a good November or December, as you know. So, if we can improve on last year's November and December. It's like I said, we have the placement of products out there and the doors are much greater than before. This can be a completely different story, but we have to take a pessimistic approach right now.

So that pessimistic approach, I guess, it also deals with the September, you said a significant falloff in ordering. It kind of just seems like it dried up in late September. Are you saying that things were flatish in October, and also beginning here in this month are we seeing any kind of improvement yet?

Yes, but still we want to be conservative. We are and we're seeing improvement on a weekly basis, frankly, but that doesn't mean it's going to continue and we're just very concerned about the economy and the consumer.

What does the all the promotional activity that we're seeing right among retailers do for you guys? I mean how do you participate in that?

Well, we're not -- our margins are remaining the same, but we're not discounting our products. This could be a good thing for us. It's possible and we've been talking about internally. If the retailers are going to get consumers into the stores, then we will sell products. But we're not about to start discounting our products. There's no purpose to it. There will be no gain for us to do that. All we do is give up margin, so we're going to hold our course when it comes to that. If there are more people shopping the stores and the retailers are successful in their strategies, then we will benefit.

All right, then on your repurchase activity, it looks like you spent about - you have $5 million left, is that correct, in your current authorization?

That's correct.

And what happens next year? I mean as you look out at your cap ex coming down and you're bringing in some cash from the sale of the building, what sort of opportunity might this create for your Board to buy back additional stock?

Well, we think that there are a number of potentially attractive uses for free cash flow in our business. One would be a share repurchase. We also, as we continue to talk about and examine, acquisition opportunities. Both of those provide more attractive ways for us to continue to reinvest in the business and provide an attractive return to shareholders. At this point, I'm not sure I have any specific comment on the likelihood of additional share repurchases, but it's something that we will certainly evaluate and consider and continue to discuss among ourselves.

And then just finally on the Canadian distribution relationship, or the change in that agreement with that distributor, can you quantify that for us and give us a sense for what that business might mean next year?

Well, if you look at our current penetration in the Canadian market, it's about half of the level that it should be right now. And where it should be economically is about 10% of the size of the U.S. economy. So, if you were to use those statistics and back into a number, it is a material and important opportunity for us, but not necessarily one that is massive in its overall size?

Would margin rates be similar to what you're seeing in the U.S.?

Well, that's one of the opportunities we have to deliver on in the Canadian market is through optimizing our supply chain in conjunction with our new Canadian partner to be able to achieve enhanced margins on a level consistent with our business in the U.S.

Okay great. Good luck. Thank you very much.

Thanks.

Your next question is from David Cohen with Midwood.

My question's actually been answered. Thanks.

(OPERATOR INSTRUCTIONS). Your next question is from Clinton Meynard with Morehead Capital.

Hey, guys, how are you doing today?

Hi, Clinton.

Just a couple of quick questions for you. When you talk about inventory adjusted for acquisition, and you're looking to go into the year-end at $155 million, can you quantify what the adjustment is? I mean am I actually looking and expecting you guys to be at $155 million, or is that a different number and what would the new number be?

The comparable number would be about $160, $161, compared to last year's $155 for the Gorham and the Pomerantz transactions that we closed on during this year.

Yes, I think at year-end it'll probably be around $6 or $7 million of inventory between those two acquisitions on the balance sheet.

Got it.

That's last year. We do expect to do considerably better this year. I don't want to put a number on it. We have an internal goal and we're on track to reach our goal, but I won't put a number on it yet.

Great-great. As far as the share count thing, and I don't want to beat this to death, when I'm looking over your press release today and it's showing that you guys have got a $0.05 spread between basic and diluted for the third quarter. But if you look at the end-of-year numbers last year, that virtually goes away. I was just wondering if you could explain to me why the third quarter would have a different dilution effect than the end-of-year numbers.

I mean I haven't looked at that, but I suspect it has something to do with the fact that the debentures are outstanding for the full period this year versus a much shorter period; it's effect on last year.

Okay, just thought and the reason I'm asking, is in the third quarter of last year there was a $0.05 discrepancy in the third quarter of this year there's not a discrepancy, and yet the nine-month number there's no discrepancy for last year or this year.

The third quarter doesn't [unintelligible].

Chris has given me a comment that this is from the accounting clerks. But when the effect of the conversion is anti-dilutive, meaning it would increase your earnings per share, you just don't sell it. It's just an accounting convention.

I've got you. All right, I appreciate that. Last question, when you look at some of the retailers discounting product, what impact does that have on you? Do you feel like the retailers, the Wal-Marts of the world come back and say, "Hey, you've got to work on the margin with us because we're having to discount this to get it out the door," or do you not have a pushback associated with the discounting environment on the retailer side?

The decisions on the product, whether it be Wal-Mart or anyone else, to discount now was made several months ago, or at least a month ago with each of the vendors that they do business with. We've always worked with all of our retail partners on products to make sure that they sell through. This is an ongoing thing and we offer them lower prices at times for promotions, which is built into our pricing structure and we've done this for very, very many years. I don't see any more of it now than I saw last year or the year before or in the past. But we always work with the retailers on special promotional items that they like to promote on.

And a last question, can you just give me a letter, especially in the fourth quarter with a link the order cycle is? You know, if Kohl's wants more product to be available in December, is that possible for you guys?

Yes, we're prepared. The major retailers on a frequent basis, some of the larger ones order up to five times a week from us. So, there's no backlog of orders, significant backlog of orders for our biggest customers. The orders are given to us and we ship them within three days. We are prepared to do everything that we originally prepared to ship in the fourth quarter for this year. So, we're -- if the order comes through and the retailers do well, we have the product. We're there. Yet, at the same time, we're being very careful with our inventories to make sure that we have the right inventory in place to be able to capitalize on increases in business versus having any inventory that we would carry further on.

All right, guys. Well, thanks a lot and good luck.

Thank you.

Your next question is from Rick Federman with Federman Investments.

All right, good morning. With respect to use of cash that someone had mentioned just a call earlier, can you give us an idea in what range you expect the short-term debt to be at either year-end or shortly after in January when a lot of the receivables have been collected?

Obviously, a lot is the function of where we fall within our guidance, but I think to put a number of debt outstanding under the bank credit facility of about $75 million, you now about half drawn, is reasonable. That's obviously significantly improved from where we are today. And that analysis does reflect the funding of the Ekco transaction, as well as closing on the sale of our old corporate facility.

In the second quarter call, you commented that a large order for food prep was shipped in July versus June, obviously causing the second quarter to be a little bit light. Is it fair to say if that order had been shipped in June that the third quarter revenue would have been down from last year?

It would have been probably flat.

That $800,000, I don't it was that.

No, it's not that much. It's not that significant.

Okay. Do you feel the lower end of your revenue guidance for this year of $500 million as a - do you view that as a worse-case scenario, or are you hoping for a few last-minute orders to come in to get you to that number?

No, as I said before, the ordering process in retail is an ongoing thing. So, we don't have the orders through our quarter in advance. It's an absolutely constant process. Most of the bigger retailers that we deal with give us the orders only three to five days out from when they want them shipped. They don't give long-range orders. There are a few parts of our business that we do get some longer-range orders, but for the most part no.

Let me just put a little additional color on that. Year-to-date, as of September 30, the organic growth rate in our Wholesale business, which is a key driver of the overall Company growth, was approximately 5%. The low end of our revenue guidance range includes an organic growth rate that is below that level, which I think all of us would characterize it concerns us.

Okay, thank you. That helps. What's the magic date where essentially all the - everything that's going to be shipped for holiday is out the door?

There's two parts to that. To answer your question specifically, the holiday I would say is probably about December 15 or so. But, we do get orders from retailers for January. The new sets for the new Planograms which are sometimes are shipped in late December it's after Christmas. So, it depends on the year. Some retailers set early and they want us to ship in the period between Christmas and New Year's for their new Planograms for the following year. So, there's two parts to your question. It's early December for true Christmas business and on the 15th maybe, but there's certainly in some years we have significant shipments in late December after Christmas.

Thank you. One last question, the first caller - I believe it was the first caller asked about the decline in revenue of using the mid-range from previous estimates of about $30 million and the decline in earnings of as much as $0.50 a share. Again, taking the mid-range, ignoring the money made from the sale of the building. And the response was, of course, was regarding the loss of operating leverage. A $30 million decline in revenue generates about $7.5 million - generates $7.5 million less in profit? Did I get that right?

But if you look at our gross margin, there's $12 million in gross margin; over $12 million in gross margin, in gross margin dollars in $30 million sales. You watch our margins so you can figure that out pretty much yourself. There's not many additional costs involved in doing that $30 million in business.

Okay. All right, thank you very much.

Your next question is from Alvin Concepcion with Citigroup.

Hi, everyone, just a couple of questions. I'm looking into the fourth quarter. Are there some differences in the product mix maybe versus the third quarter that would significantly have a different margin profile?

No, not really. The product mix in the fourth quarter is certainly similar to the third quarter or other quarters. The only change, the DTCs, the Direct to Consumer business certainly, as you know, the margins are improving, so you know. Again, we'll improve in the fourth quarter we expect.

Okay, great, and then looking forward to 2008, where do you see the most opportunity in your business right now?

In a number of places, you know, obviously we've become very aggressive in gaining market share. Because we've taken the attitude over the last several months that if the consumer is going to be reluctant to buy merchandize, then what we have to do to grow our business is to get more market share. So, we've aggressively increased our product development to bring more products to market for 2008 than we ever have. Also, we're going to be entering several new categories of business internally, and not through our acquisitions, just organically. But within the divisions that we have there are categories that offer significant opportunity to improve our business and grow those categories of businesses that we're currently not in. But there are divisions to the categories to what we do business with and we have some expertise in them.

In addition to that, I mentioned the Baskonia initiative, which we think is a significant initiative for the Company because we're addressing a huge part of the population that's underserved; 45 million people in America. And there is no one else that really focuses properly on this segment of the business within our businesses that we're in. So, those are huge opportunities for us as well.

Great, and then you talked about new categories not through acquisition. Are there some categories that you will focus on, or maybe are thinking about that you would consider for acquisition?

We're always looking at acquisitions. It's an ongoing process. There are many potentials out there. It has to be appropriate. It has to be right for the Company. There are more available than I think we've ever seen. Just to give you an idea. I got two calls on Monday, last week, one day last week. Two calls for potential acquisitions, both of which make sense for the Company that we're looking at. But it's an ongoing process. We're not -- that will continue.

Are you seeing the takeout multiples going down since maybe like a quarter ago?

Let me just say that most of the acquisitions that we consider are on an exclusive basis. And those in which there is competition, frankly, we usually wind up walking away from. But, I think the present, or the challenges in some of the credit markets have scared some folks away, not strategic buyers, to our benefit.

Great. Thank you very much.

Your next question is a follow up from Gary Giblen with Goldsmith Harris.

Yes, hi. Would you ascribe the sales weakness to any extent to housing starts? I mean I realize housing has an impact on consumers, but is it housing starts? And also is the wedding-related business as strong as it has been in recent years?

No, I wouldn't attribute it to housing starts. I don't think that's really significant. I think that it's just more than anything else it's the price of gas and the price of oil are the two strongest things in my mind that are affecting consumers, especially the moderate to lower-end consumer. As one retailer told me that their average customer has earnings of $20,000 a year with a take-home pay of $350.00 a week and then putting $60 a week into the tank of a car is just killing the consumer and which certainly makes a lot of sense to me. But, I don't see that as being -- I think that's the biggest issue. I don't think housing starts are the issue.

Okay and is the wedding biz still fine?

Yes, no matter what people get married and many of the products we sell are oriented towards brides. I mean this new Sterling initiative that we have which is - we really had a spectacular Tabletop show because of it. It's really an initiative aimed towards brides and it was very well received by retailers and we're very enthused with it.

Okay, great. Thanks, Jeff.

There are no further questions at this time. You may proceed with your presentation or any closing remarks.

Thanks, everyone for joining us this morning. We look forward to speaking to you again after our fourth quarter. Thank you.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and as that you please disconnect your line.